Question

Assess this statement: "Activity-based costing is only useful for manufacturing companies". Do you agree or disagree, why?

Please answer in more than 350 words and only in word format. Please dont copy paste from websites.

Answer 1

Activity Based Costing (ABC) is used to provide the allocation of overhead costs on the basis of the amount of activities consumed. The given statement "Activity-based costing is only useful for manufacturing companies" is not necessarily true because ABC is not only useful for manufacturing companies but also for other types of companies, like service and merchandising companies.

However, the activity based costing is visible more often in the manufacturing companies due to its use for product costing and setting prices to the products. ABC helps to determine the cost flow within an organization. The cost flow of manufacturing companies is higher than that of the other two types of companies. Therefore, it is seen as if ABC is only useful for the manufacturing companies.

But it is also useful in service companies. Activity Based Costing is useful in determining the selling costs (such as advertising, customer service costs) and administrative costs (such as executive salaries, accounting , research and development costs). It has turned out to be progressively essential for organizations whose business sectors are turning out to be more competitive.

Since ABC is about cost management, using it allows service companies to reduce and control their costs in order to make correct pricing and other decisions, and to increase their profitability. Due to emerging of new competition, there has been a considerable change in services and other sector.

Hence, ABC is still developing. It has lot of advantages over the traditional methods. It assigns the cost of those activities only to the products that are actually demanding and consuming the activities. It is more illustrative distribution of resource used as the costs allocation are based on the direct cost drivers inbuilt in each of the work activities that make up the organizational structure.

Hence the given statement is not necessarily true.